View from City Road: Fruits of securitisation

Some of the bigger banks are planning for the recovery in lending by tidying up their balance sheets. By the process of securitisation, the banks bundle up loans, create a company to hold them, and sell bonds secured on them. Securitising the loans gets them off the bank balance sheet, thereby freeing the capital, which the bank can use to back new loans.

Barclays was the first UK bank to repackage mortgage loans and securitise them under the Bank of England's new capital requirements in 1989 and it was true to form yesterday when it became the first to securitise unsecured personal loans. Its pounds 280m issue backed by unsecured loans helps its capital positions even more than securitising mortgages, because unsecured loans are deemed to be riskier and require more capital backing under Bank of England rules.

US banks have been securitising loans since the 1960s, but the practice has been slower to gain acceptance here. British accounting standards have required banks to keep the assets on the balance sheet after securitisation, removing much of the incentive. But after a high-profile battle with the Accounting Standards Board, Barclays Bank persuaded it to change its ruling earlier this year.

With National Westminster Bank securitising pounds 300m of mortgage loans last week, and Barclays planning another mortgage loan securitisation later this year, a trend seems to be developing. The economy is likely to benefit, since banks will be in a better position to lend when business propositions pick up.